FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit
A regulator worries that bank retrenchment has moved risk rather than removed it. Banks now provide credit lines and leverage to private credit funds. Which risk is the most direct concern from this interconnectedness?
The main concern is feedback to banks: banks lend to and provide credit lines to private credit funds, so stress in the funds, such as large drawdowns or losses, can transmit back to bank balance sheets. Retrenchment therefore shifts risk but leaves banks indirectly exposed.
- AStress at private credit funds could transmit back to banks through drawn credit lines and funding exposures, linking the two sectorsCorrect
- BBanks lose all exposure to credit risk once lending is done through funds
- CPrivate credit funds become subject to deposit insurance, increasing moral hazard only for depositors
- DInterest rate risk disappears because fund loans are floating rate
Explanation
Retrenchment shifts origination to non-banks, but banks remain exposed via backup facilities, subscription lines and leverage provided to funds. Losses or liquidity strains at funds can feed back into banks. Banks do not eliminate credit risk through this channel.
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